Rating Rationale
July 01, 2020 | Mumbai
The Supreme Industries Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.1612 Crore (Reduced from Rs.1760.8 Crore)
Long Term Rating CRISIL AA/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.200 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA/Stable/CRISIL A1+' ratings on the bank facilities and commercial paper of The Supreme Industries Limited (Supreme). CRISIL has also withdrawn its ratings on Rs 148.8 crore of bank facilities. The withdrawal is in-line with CRISIL's withdrawal policy.
 
The ratings reflect the likely impact of the lockdown measures taken by the central and state governments towards containment of the Covid-19 pandemic and the consequent revival in economic growth on Supreme's business risk profile. These could result in lower-than-expected revenue for the company in fiscal 2021. However, operating margin is expected to be supported by the diversified revenue base with a healthy share (around 35%) from high-margin, value-added products, lower raw material cost owing to falling crude prices, and gradual ramp-up in operations, given the non-discretionary nature of products.
 
Operating performance remained steady in fiscal 2020, with flat revenues, driven by 8.6% year-on-year (y-o-y) growth in revenue from the plastic piping segment that offset the decline in other segments. Overall volume growth in fiscal 2020 was about 3% that offset the fall in realisation over the previous fiscal. Operating margin improved by about 200 basis points (bps) to 15.1% in fiscal 2020 due to the drop in average raw material prices. Furthermore, the financial risk profile remains robust supported by the strong capital structure (gearing of 0.18 time as on March 31, 2020) and debt protection metrics (net cash accrual to adjusted debt and interest coverage ratios of 1.12 times and over 40 times, respectively, for fiscal 2020).

The ratings continue to reflect Supreme's strong business risk profile, healthy market position across segments, and robust financial risk profile. These strengths are partially offset by intense competition and exposure to volatility in raw material prices in-line with the industry, though Supreme has the ability to pass on price fluctuations to customers.

Analytical Approach

CRISIL has combined the business and financial risk profiles of Supreme and its wholly-owned subsidiary, Supreme Industries Overseas FZE. Investment in associate company, Supreme Petrochem Ltd (Supreme Petrochem), has been recognised as per the equity method, as Supreme holds 30.01% stake in it. Its investment in the joint venture, Kumi Supreme India Pvt Ltd (with 20.67% shares that was exited in March 2020) has been moderately consolidated.
 
CRISIL has also factored in Supreme's income from the real estate segment as a part of non-operating income because the entity's core business is the manufacture of plastic products (and not real estate).

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Diversified revenue
Supreme produces plastic-based products for plastic piping systems (63% of fiscal 2020 revenue), industrial goods (12%), consumer goods (7%), packaging products (18%), which cater to several end-user industries, mitigating the risk of slowdown in any one product segment or industry. Furthermore, revenue is supported by the increasing contribution of value-added products (35% for fiscal 2019), which have operating margin of over 17%.
 
* Healthy market position across business segments
Supreme has an established track record and strong market position in each of the segments it operates in, backed by its widespread distribution network and ability to introduce new products. Its proven product development capability benefits from collaborations with international manufacturers, resulting in strong revenue growth and above-average profitability. The company has about 3,800 channel partners, supported by 25 plants across the country. Supreme has set up a facility each in Giloth (Rajasthan) and Jadcherla (Telangana) in fiscal 2019 and is prioritising construction of the greenfield plant at Odisha. Strong country-wide presence helps reduce freight cost and lead time for products to reach customers.
 
* Robust financial risk profile
Comfortable networth, low gearing, and strong debt protection metrics keep financial risk profile strong. Networth was Rs 2,261 crore as on March 31, 2020, with steady growth in cash accrual and low gearing of 0.18 time. Debt protection metrics remain strong with net cash accrual to adjusted debt and interest coverage ratios of 1.12 times and over 40 times, respectively, for fiscal 2020. Expected annual net cash accrual of around Rs 450 crore should suffice to fund the capital expenditure (capex) and working capital requirements in the absence of any long-term debt obligations.
 
Weakness
* Susceptibility to volatility in raw material prices and to intense competition
Supreme is susceptible to volatility in the prices of key raw materials, polyvinyl chloride, high-density polyethylene, and polypropylene, which are affected by change in crude oil prices and foreign exchange rates, albeit partly offset by its ability to pass on price fluctuations to the consumers. Furthermore, Supreme has to maintain large raw material (constituted 65% of the operating income in fiscal 2020) inventory, and volatility in input prices impacts working capital management. The plastic processing industry is also highly fragmented, especially in commoditised product segments, such as plastic furniture. However, Supreme partially mitigates the competitive pressure by offering value-added products and has, thus, maintained healthy market share across segments.
Liquidity Strong

Liquidity should continue to be strong. The absence of repayment obligations permit the entire cash accrual to be used as working capital. Bank line of Rs 1,704 crore, including fund and non-fund based limits, was utilised moderately at 35% on average during the 12 months through February 2020, and cash and bank balance were healthy at Rs 231 crore as on March 31, 2020. Moderate capex of Rs 150-200 crore in fiscal 2021 is likely to be funded through internal accrual. Dividend payout of 40% of net profit could constrain accretion to liquid reserve. Working capital requirement was sizeable (albeit with slight increase in inventory as of March 2020 owing to delayed offtake, driven by the restrictions imposed to contain the pandemic) with receivables and inventory at 21 and 70 days, respectively, as on March 31, 2020. Furthermore, Supreme has sufficient liquidity in the form of unutilised bank limit to cover the fixed costs for the next 3-4 months.

Outlook: Stable

CRISIL believes Supreme's business risk profile will remain stable over the medium term, supported by diversified revenue, strong market position across segments, and healthy share of value-added products. The financial risk profile is expected to remain robust, in the absence of long-term debt that should help sustain strong debt protection metrics. Capex is likely to be funded through internal accrual.
 
Rating sensitivity factors
Upward factors
* Sustained revenue growth of over 12% and operating margin of 15%
* Efficient working capital management and sustenance of financial risk profile
 
Downward factors
* Steep decline in revenue, with operating margin falling below 12%
* Weakening of capital structure because of large, debt-funded capex or acquisition
* Sizeable stretch in the working capital cycle

About the Company

Supreme, India's leading processor of plastic, was incorporated in 1942. The product portfolio is diverse and comprises plastic piping systems, cross laminated films and products, protective packaging products, industrial moulded components, moulded furniture, storage and material handling products, performance packaging films and composite, and liquefied petroleum gas cylinders. It has 25 manufacturing facilities across India.
 
For fiscal 2020, revenue remained flat with 9% y-o-y growth in the plastic piping segment, which off-set the decline in other segments. Overall volumes grew 3% y-o-y, which offset the decline in aggregate realisations. Profit after tax was higher at Rs 467 crore, as compared to Rs 449 crore the previous year.

Key Financial Indicators
Particulars Unit 2020 2019
Revenue Rs crore 5512 5527
PAT Rs crore 467 449
PAT margin % 8.5 8.1
Adjusted debt/adjusted networth Times 0.18 0.08
Interest coverage Times 41.41 24.17

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of
allotment		 Coupon
rate (%)		 Maturity
date		 Issue size (Rs crore) Complexity level Rating assigned with outlook
NA Cash credit NA NA NA 108.60 NA CRISIL AA/Stable
NA Cash credit^ NA NA NA 50.0 NA CRISIL AA/Stable
NA Cash credit and Working capital Demand loan NA NA NA 65 NA CRISIL AA/Stable
NA Import documentary credit NA NA NA 150 NA CRISIL A1+
NA Letter of credit NA NA NA 175 NA CRISIL A1+
NA Letter of credit $ NA NA NA 110.0 NA CRISIL A1+
NA Letter of credit & bank guarantee NA NA NA 453.40 NA CRISIL A1+
NA Letter of credit & bank guarantee ** NA NA NA 15 NA CRISIL A1+
NA Letter of credit ^ NA NA NA 200 NA CRISIL A1+
NA Overdraft facility NA NA NA 110 NA CRISIL AA/Stable
NA Working capital demand loan @ NA NA NA 125 NA CRISIL AA/Stable
NA Working capital
Demand loan		 NA NA NA 50 NA CRISIL AA/Stable
NA Commercial paper NA NA 7-365 days 200 Simple CRISIL A1+
^Fully interchangeable with working capital demand loan, buyer's credit's sub-limit of Rs 40 crore, letter of credit sub-limit of Rs 30 crore, and bank guarantee sub-limit of Rs 11 crore
$Fully interchangeable with buyer's credit, purchase bill discounting sub-limit of Rs 50 crore and working capital loan sub-limit of Rs 75 crore
** Bank Guarantee Interchangeable upto Rs 14 crore
@Fully interchangeable with letter of credit and buyer's credit, interchangeable with Rs 25 crore of bank guarantee
 

Annexure - List of entities consolidated
Name of company Extent of consolidation Rationale for consolidation
Supreme Industries Overseas FZE Full Wholly owned subsidiary
Supreme Petrochem Ltd Moderate 30.01% stake
Kumi Supreme India Pvt Ltd Moderate 20.67% stake
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  200.00  CRISIL A1+  30-04-20  CRISIL A1+  02-04-19  CRISIL A1+  03-04-18  CRISIL A1+  30-11-17  CRISIL A1+  -- 
                31-01-18  CRISIL A1+       
Short Term Debt  ST                  17-02-17  CRISIL A1+  CRISIL A1+ 
Fund-based Bank Facilities  LT/ST  508.60  CRISIL AA/Stable  30-04-20  CRISIL AA/Stable  02-04-19  CRISIL AA/Positive  03-04-18  CRISIL AA/Stable  30-11-17  CRISIL AA/Stable  CRISIL AA/Stable 
                31-01-18  CRISIL AA/Stable  17-02-17  CRISIL AA/Stable   
Non Fund-based Bank Facilities  LT/ST  1103.40  CRISIL A1+  30-04-20  CRISIL A1+  02-04-19  CRISIL A1+  03-04-18  CRISIL A1+  30-11-17  CRISIL A1+  CRISIL A1+ 
                31-01-18  CRISIL A1+  17-02-17  CRISIL A1+   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 108.60 CRISIL AA/Stable Cash Credit 261 CRISIL AA/Stable
Cash Credit^ 50 CRISIL AA/Stable Cash Credit^ 100 CRISIL AA/Stable
Cash Credit 76.4 Withdrawn Cash Credit & Working Capital demand loan 50 CRISIL AA/Stable
Cash Credit & Working Capital demand loan 65 CRISIL AA/Stable Import Documentary Credit 150 CRISIL A1+
Cash Credit & Working Capital demand loan 17.3 Withdrawn Letter of Credit* 92 CRISIL A1+
Import Documentary Credit 150 CRISIL A1+ Letter of Credit$ 100 CRISIL A1+
Letter of Credit 175 CRISIL A1+ Letter of Credit 317.1  CRISIL A1+
Letter of Credit$ 110 CRISIL A1+ Working Capital Demand Loan@ 125 CRISIL AA/Stable
Letter of Credit^ 200 CRISIL A1+ Overdraft 65 CRISIL AA/Stable
Letter of credit & Bank Guarantee 453.4 CRISIL A1+ Letter of credit & Bank Guarantee 500.7 CRISIL A1+
Letter of credit & Bank Guarantee** 15 CRISIL A1+ -- 0 --
Letter of credit & Bank Guarantee 55.1 Withdrawn -- 0 --
Working Capital Demand Loan@ 125 CRISIL AA/Stable -- 0 --
Working Capital Demand Loan 50 CRISIL AA/Stable -- 0 --
Overdraft 110 CRISIL AA/Stable -- 0 --
Total 1760.8 -- Total 1760.8 --
^Fully interchangeable with working capital demand loan, buyer's credit's sub-limit of Rs 40 crore, letter of credit sub-limit of Rs 30 crore, and bank guarantee sub-limit of Rs 11 crore
$Fully interchangeable with buyer's credit, purchase bill discounting sub-limit of Rs 50 crore and working capital loan sub-limit of Rs 75 crore
** Bank Guarantee Interchangeable upto Rs 14 crore
@Fully interchangeable with letter of credit and buyer's credit, interchangeable with Rs 25 crore of bank guarantee
 
^^Fully interchangeable with working capital demand loan, buyer's credit and letter of credit
*Fully interchangeable with buyer's credit
$$Fully interchangeable with packing credit in foreign currency and buyer's credit
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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